Where's the money?

April 08, 2013

A child plays with an ATM in Cyprus, a country hit by a banking crisis. Its banks have been used by people in other nations to hide money, and millions of dollars have been lost. (Bogdan Cristel, Reuters photo)

For years, international law enforcement has tried, with modest success, to target offshore banking centers that provide a veil of secrecy for tax evasion and money laundering. That's one reason why the assault on bank deposits in Cyprus has been greeted with broad alarm ... and just a smidgen of quiet satisfaction. Yes, innocent depositors will be hurt. But some people who have taken robust advantage of one of the world's leading tax havens also stand to lose a substantial share of their hidden wealth.

Over the past decade, wealthy Russians and other foreign nationals have parked huge sums in Cypriot banks that ask no questions about where the money originates. Setting up shell corporations and trusts that effectively disguise assets has become a local cottage industry. The billions of euros on deposit dwarf the size of the Cyprus economy. It is difficult to imagine why so much money would migrate from oil-rich Russia if not, at least in part, for the purpose of laundering funds and cheating on taxes. Tax evasion is one of the most significant economic problems Russia faces.

When the Cypriot banks failed, as a result of bad loans and a weak domestic economy, Cyprus struggled for months to negotiate a bailout. European bankers and the Cypriots agreed to a deal earlier this year that would have broken the government's promise to insure bank deposits up to 100,000 euros.

That attack on the sanctity of deposit insurance was a terrible misstep. It threatened to undermine financial stability around the world. We suspect the only reason the Cypriots wanted to target smaller accounts was to spread the pain widely, in the vain hope of preserving their banking relationships with cash-laden foreigners.

Fortunately, global markets gave that initial plan a thumbs-down, and within days a new bailout deal emerged that honors deposit insurance up to the promised 100,000 euros. After that, look out. Accounts with more than 100,000 euros could lose up to 60 percent of their value.

Bitter medicine, indeed. But at least some of the pain will fall on a fitting target: people who used Cyprus banks to hide cash.

No one should weep for the oligarchs. Even the Russian government, which protested the "unfair" terms of the first bailout, evidently has decided to let the chips fall. Last week, a senior Russian official announced that Russians who stand to lose bank deposits in Cyprus should not expect their government to reimburse their losses.

This development in Cyprus is more likely to shake the international banking system than it is to spread the message that international tax cheats run a serious risk of getting nailed. That, however, is a message that might start getting through to people.

Consider the case of Peter Troost, a businessman in north suburban Skokie, who recently pleaded guilty to tax evasion. Troost operates a gravestone company known as Troost Memorials, as well as a couple of strip malls. (U.S. prosecutors noted that he is not involved with another local company with a similar name, Peter Troost Monument Co. of Hillside). Troost earned hundreds of thousands of dollars in a typical year but, according to his plea agreement, he reported much less on his income tax returns, using an offshore account with Swiss bank UBS.

Troost is the first taxpayer charged in federal court in Chicago as part of an ongoing investigation of overseas banks that hid foreign accounts from the Internal Revenue Service. In an agreement with prosecutors, UBS turned over the identities and account information for thousands of American customers who allegedly have secret deposits.

Troost is likely to be one of many who will experience serious consequences for falsifying tax returns. Under his plea agreement, Troost will pay a $3.3 million civil penalty. He faces a possible prison term of 37 to 46 months, according to the government's preliminary sentencing calculations.

Evidence, perhaps, that those who engage in high-stakes tax evasion face greater risk of getting caught. Tax cheats shouldn't be able to count on banking secrecy laws to mask their illicit dealings in Switzerland, Cyprus or wherever the veil over deposit records will lift next.

To be effective over the long run, global action against tax evasion will require a patient, sustained effort.